Colombia Looking to Sustain Economic Growth

On 7 August, Juan Carlos Santos, Colombia’s former defence minister, was sworn in as the country’s new president following his landslide victory in June’s general election. Described by US politicians as a “bright, articulate and capable man”, he replaces Álvaro Uribe, who, during the past eight years, crushed leftist guerrillas and demobilised the right-wing paramilitaries, thereby reducing violence and restoring business confidence, and setting the country to economic growth. The new president has promised to sustain this growth and introduce social reform. At the same time, using his experience as defence minister involved with battering the guerrillas, he is moving to deal harshly with the urban gangs, mostly run by members of the former paramilitaries, who are still capable of causing disruption and chaos through their drug-trafficking activities.

Colombia’s main trading partners are Venezuela and the US, but the past year’s cross-border tensions between Colombia and Venezuela came to a head at the end of July 2010 with diplomatic relations being severed and hundreds of Venezuelan troops massing on the border with Colombia as the threat of war loomed. Colombia’s previous administration had accused its neighbour of aiding and sheltering the Revolutionary Armed Forces of Colombia (FARC), whose aim was to disrupt the government. Venezuela, on the other side, had been ranting about Colombia’s ties with the US, especially over a deal to allow US soldiers access to military bases.

As soon as Santos came to power he began making conciliatory overtones by saying that he wanted to create a fresh page and begin talks. As a result, the two leaders met last month in Santa Maria, a city on Colombia’s Caribbean coast, and agreed to restore diplomatic ties and to step up security along the border to prevent Marxist guerrillas mounting attacks. The agreement could pave the way for a restoration in trade between the two countries and assurances that Venezuela will pay debts to exporters. However there is much scepticism that cross-border business can be restored. Carola Sandy, an analyst with Credit Suisse is certainly not convinced: “I would not expect a sharp pick-up in Colombian exports to Venezuela in the near term. Moreover, Colombian producers will be cautious as there is a risk that diplomatic / trade disputes re-appear. In the meantime Colombian producers will probably continue to seek different markets for their products as they have been doing for the past several months”. Colombia is South America’s fourth biggest economy. Its recovery from the economic crisis has been slower than in other nations in the region, partly due to its dispute with Venezuela. Cross-border sales fell 70% in the first half of 2010, and it seems that Colombian exporters are wary of dealing with their neighbour given Chavez’s unpredictability. Quite apart from this, Venezuela still owes Colombian companies US$800 million.

Maintaining a balance

Just after the meeting between Santos and Chavez, the Washington Post carried an interesting comment on Colombia’s relations with the US, a country that has been Colombia’s closest ally in fighting the rebels and the drugs trade. It sees Santos, the new president, facing a fundamental dilemma: balancing a more diplomatic approach toward Venezuela, while maintaining an overall strategic alignment with the US. Venezuela’s President Chavez will certainly continue to challenge such an alignment and will try to curtail US influence in the region. The comment reminded readers that Latin America viewed the previous president, Álvaro Uribe, as doing Washington’s bidding. That said, Colombia under the previous president’s leadership achieved great economic progress and increased foreign investment during the past seven years.

“His foreign policy strategy will include normalising relations with Ecuador and deepening economic and political relations with Mexico, Peru, Chile and Brazil. Perhaps significant is his intention to engage more directly with Asia (China in particular), where Colombia has been relatively slow in taking advantage of opportunities for economic cooperation compared with other Latin American countries.”

On the domestic side Santos faces huge challenges as his country has one of Latin America’s most unequal income distributions and highest unemployment rates. It remains to be seen how he will carry out the transformation that he promised in his inaugural address. His foreign policy strategy will include normalising relations with Ecuador and deepening economic and political relations with Mexico, Peru, Chile and Brazil. Perhaps significant is his intention to engage more directly with Asia (China in particular), where Colombia has been relatively slow in taking advantage of opportunities for economic cooperation compared with other Latin American countries. In a special report published in the Latin Business Chronicle, it was noted that Asian countries are keen to do business with Colombia now that there is improved security and rapid economic growth. China is ready to negotiate a Free Trade Agreement (FTA), while the Japanese government has already started Bilateral Investment Treaty negotiations that could lead to an FTA in the future. Japan has about 40 companies operating in Colombia, including the trading companies, Mitsui, Sumitomo, Marubeni and Itochu Corporation and the manufacturers Sony and Isuzu. China’s relations have been developing steadily and bilateral trade is said to be booming and investment increasing. However, the problem of trade imbalance needs addressing, especially as Colombia fears that there could be a flood of Chinese products into the country, while the question of what Colombia can sell to China might not be quickly resolved.

Long term for Argos

In July 2010,Colombia’s largest cement producer, Cementos Argos, signed a contract to sell US$65 million worth of cement and other supplies to the consortium that is expanding the Panama Canal. It will start supplying cement for a new set of locks from December 2010 until the first quarter of 2014. The company has a substantial facility in Panama and over the past five years has invested US$ 100 million in upgrading its operations there. The company’s Panamanian unit will manufacture the cement through its plant located in the Caribbean port of Cartagena, and if necessary will back up the Panama operations if required. Argos is the country’s leading cement producer with 51% of the market. In addition to its investments in Panama, Haiti and the Dominican Republic, it is the sixth largest concrete producer in the US and it also exports cement and clinker to 27 countries around the world, demonstrating that the Group is completely international. It should be noted that at almost the same time, Cemex announced that it had won a similar contract to supply 0.5 million t of cement for the expansion of the Canal. It has also invested in its Panama operations, to the tune of US$300 million.

Fast route to the Caribbean

There was more good news last month not only for Argos, but for all the other players that make up Colombia’s cement, concrete and construction industries. On 6 August, the IFC and the government announced the third and final concession for Ruta del Sol, a 1071 km highway between the nation’s interior and the Caribbean coast that will link Colombia’s main agricultural, industrial and urban centres. The final concession was awarded to Yuma Concesionaria S.A. PSF, a consortium led by the Italian construction company Impregilo and the financial group Bancolombia. The US$ 900 million project involves rehabilitating, expanding and operating an existing 464 km, single-lane section of the highway. The local news agency, Finchannel, notes that with a total investment of US$ 2.7 billion, Ruta del Sol will promote Colombia’s sustainable development and economic growth by improving the country’s primary road network. It is one of Colombia’s largest infrastructure projects to date and one of the largest in the region. The road will handle traffic from urban centres such as Medellin, Cali, Barranquilla, Cartagena and Bucaramanga. It will reduce travel time along the route by about three hours, thereby increasing road safety and cutting transportation costs. This comes as a real answer to the country’s needs for an infrastructure plan that links up what has been described as a ‘disjointed land’, i.e., a country almost twice the size of Texas that is split by three strands of the Andes mountain range, descending in the east to the Amazonian jungle, to the west into the forests of the Pacific shore and to the north into coastal lowlands. Until five years ago only 15% of the country’s roads were paved, most of them single lane. In a country where some 70% of cargo is hauled by truck, that made high transport costs a regular burden. Richard Cabello, Head of IFC Advisory Services stated: “The Ruta del Sol shows Colombia’s commitment to addressing its infrastructure needs and the value of private sector partnerships in providing services and meeting those needs. IFC is confident Ruta del Sol will take the country to new levels of competitiveness and lead to a more sustainable future for the Colombian people”.

It was the personal leadership of the former president Álvaro Uribe in pulling Colombia back from rapidly becoming a failed state after 45 years of civil war, high crime rates, narco-terrorism and the unraveling of democratic institutions, that has helped to stimulate the Ruta del Sol investment, as well as others in the country. It is now up to the new president to lead his country to greater achievements. While Colombia can never hope to emulate its BRIC neighbour, Brazil (seven times as big), there are those who are calling it a ‘Briquette’, even though there are still many more challenges ahead. This year international investment could reach US$ 10 billion, and that over the next five years the country’s mining and energy industry is expected to attract about US$ 57 billion. No doubt about it, Colombia is rapidly changing!